Steve Rattner Misleads on Inequality in the NYT

Steve Rattner seems to have found a new career in getting things wrong in the NYT. He was last seen ranting against those who say that "debt doesn't matter." Today the topic is inequality.

While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that:

"Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period."

A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent?

However the more important issue is a substantive one. He tells readers:

"Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That's the provision that caused Warren E. Buffett's secretary to have a higher tax rate than he does.

As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades."

Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.

For example, maintaining government guarantees for the banking system (remember the bailouts?) while relaxing Glass-Steagall and other restrictions, amounted to a massive subsidy to the financial sector. Many of the top 1 percent get their money here.

There has also been a tightening and extending of patent monpolies. One result of this has been to hugely increase the amount of money being paid in patent rents, much of which goes to the 1 percent. We currently spend close to $300 billion a year for prescription drugs. We would spend close to $30 billion a year if drugs were sold in a free market without patent protection.

The difference of $270 billion annually is roughly 5 times as much money as is at stake with the Bush tax cuts. We would need alternative methods of financing drug research, but the 1 percent so completely dominate debate that alternatives to patent monopolies are not even considered in policy circles even though they would almost certainly be far more efficient and lead to better health outcomes.

The government has also taken steps to directly drive down the wages of less educated workers. Trade policy has deliberately placed U.S. manufacturing workers in direct competition with low paid workers in the developing world. By contrast, the barriers that make it difficult for foreign professionals, like doctors and lawyers, from working in the United States have largely been maintained or even increased.

The predicted and actual result of this policy is to depress the wages of less educated workers relative to the most highly educated workers. This effect is amplified by the high dollar policy that the United States began pursuing under Robert Rubin and used the muscle of the IMF to advance following the East Asian financial crisis.

There are many other ways in which goverment policy has redistributed income upward over the last three decades. Rattner misdirects attention when he focuses on tax policy as a major cause of inequality.